Goodbye, Foster's. Hello, ??

The sale of Foster's to SABMiller could accelerate a restructuring of the Australian beverage market. Investors will, perhaps needlessly, lose an investment option but new investment opportunities should emerge.

Who on earth would pay premium prices to buy into a mature beer market? This was the question on the lips of perplexed analysts not in the past few weeks but in the 1980s when Elders IXL headed by John Elliott accelerated the globalisation of the Foster's brand by buying brewing businesses in the UK.

Twenty five years on, history has turned full circle as SABMiller takes over the geographically isolated beer company now known as Foster's Group. Ironically, the same question persists. Why on earth is SABMiller paying a premium price to buy into a mature beer market?

Part of the answer is that the price is not as generous as the Foster's directors are trying to make out. In agreeing to the transaction, there is every sign of directors bailing out having set up a sale through the divestment of the company's wine assets earlier in the year.

Foster's directors have taken a remarkably similar route to the directors of MIM Holdings in 2003. They are another example of high profile directors at a major company losing the stomach for running a business after being persuaded that asset trading would make for an easier commercial life.

The propensity of Australian directors to favour asset trading over operational success is nurtured by consultants and advisers with the freedom to move from transaction to transaction. Unfortunately, the tendency to cut and run is often contrary to the interests of investors. How can investors take a long view of their portfolios if company directors do not have a similar investment horizon?

SABMiller has not been forthcoming about its intentions so we can only speculate how the Australian beer market might evolve in the coming years as the acquirer takes advantage of its purchase. Could it be trying to do in Australia what John Elliott and his mates attempted in the UK a quarter of a century ago?

In the beer industry, there are few synergies to be had from offshore expansion. It is not possible to build larger breweries in China and, taking advantage of economies of scale, establish a low cost platform to export VB and Grolsch to the world. Except for some corporate overheads, the cost savings from amalgamation are modest.

Access to technology or advanced beer making skills is unlikely to motivate large transactions among major brewers.

The most compelling commercial argument for acquisitions in the brewing industry revolves around brand management. SABMiller has a portfolio of national brands which are seeking growth outside their home markets.

Foster's was one of the most successfully marketed international beer brands. In its heyday, its media campaigns became well know for their humorous self deprecating depiction of Australia. Using them to advantage, Foster's Lager became a mainstream brand in the UK and, although it retained only a small share of throat in the USA, recognition rates in that highly competitive market put it among the best known foreign products in the country.

As a manager of a portfolio of international brands, SABMiller will be seeking to position them in the Australian market. If a brand is seen as global, it can attract a pricing premium. A truly global brand needs to have a presence everywhere. Whether a businessman is getting off a plane in Chicago, London, Sydney or Shanghai, he needs to see the brand. Otherwise, he will be unconvinced of its global credentials.

If SABMiller seeks to do something similar in Australia as Foster's managed in the UK and the USA, it will have to displace existing brands. Given a choice between selling a can of VB or a Miller Lite, SABMiller might prefer the latter. We could see VB market share losses accelerate. Eventually, it might become a low price brand for the high volume retailers.

SABMiller has come to Australia when there are signs of some of the key Foster's brands losing their lock on Australian drinkers. Premium imported and domestically produced beers are taking share in a beverage market which has seen an explosion of choice.

At the same time, the two major retailers have been flexing their muscles. The worst fears of the Australian beer duopolists are being realised as Coles and Woolworths have tried to price their beer offerings more competitively to maximise foot traffic through their stores.

Among all these tensions, Coca Cola Amatil, run by a former Foster's executive, has flagged it wants to extend its presence in the Australian beverage market from soft drinks to hard liquor. Japanese brewers Asahi and Kirin have built strategic presences with their own beers and high profile brand acquisitions through Schweppes, Lion Nathan and National Foods, as they size up the Australian market.

Against this background, the entry of SABMiller could catalyse a radical transformation of the Australian beverage market. The iconic positioning of VB may be history. SABMiller could well decide to accommodate consumers keen to see alternatives.

At a minimum, Coca-Cola Amatil is likely to tackle the market more aggressively once it has fulfilled the terms of its standstill agreement with SABMiller and quickly build share in a less stable market structure. The others will be poised on the edges to take advantage of any signs of weakness on the part of the historical market leader as its new owner manoeuvres to get a return on its hefty investment.

As they all jostle for position, opportunities might emerge for new, nimble participants to enter the fray, taking advantage of an increasingly fickle drinker through skilful branding. Of course, Coles and Woolworths will almost certainly be planning their own radical changes to the market structure as these tensions play out.

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